Article

Insights from CAGNY 2023

We share our perspectives on this year's themes and the implications for consumer goods companies.

Richard Webster, Jorge Rujana, Sam Rovit, and Charlotte Apps

First published on марта 01, 2023
min read


Last week, leaders of publicly traded consumer product companies gathered at the annual Consumer Analyst Group of New York (CAGNY) conference to share their companies’ performances and strategies. Twenty-nine companies across food, beverage, and home and personal care were present. Below are our perspectives on the strategic themes and implications for the industry. Strong performance this year is the result of normalizing supply chains and price increases that were met with low elasticity The least surprising theme was that companies achieved strong top-line performance by passing cost inflation on to retailers and consumers in the form of price increases, as well as by boosting product availability and service levels along with the continued normalization of supply chains. What we found more noteworthy was that the leading companies maintained or even increased brand investment. Procter & Gamble’s CEO was clear: Sustained investment is the key to superior value, and the company will sooner pass on inflation to consumers and customers than cut investment and support for brands. Representatives from Diageo, L’Oréal, and PepsiCo all pointed to strong increases in their marketing and advertising spending over the past few years. They all articulated slightly different versions of the following virtuous cycle: Improve top-line growth and manage costs down to invest back into advertising and promotion, which in turn bolsters top-line growth. Consumer goods companies are optimistic about the future and presume a macroeconomic soft landing Companies’ strong growth expectations implicitly assume that there will not be a significant global recession and that robust consumer spending will continue, rebuffing what we've heard from consumers. A belief that capacity will remain a constraint on volume in this environment led many to announce plans for additional capacity to come online in the latter half of 2023. Most companies reiterated their growth expectations, which ranged from low-single-digit revenue growth for North America–centric food companies to mid-single-digit growth for global home and personal care companies to high single digits for global beverage, snacking, and beauty companies. All assumed positive operating leverage that would result in even higher operating profit growth. Few companies expressed concerns about competition from private labels, with many indicating that their categories are underexposed. The best performers talked about how they’ve collaborated closely with retail partners, especially to ensure pricing actions. Other consumer goods companies, however, omitted meaningful discussions about how they plan to partner with retailers on implementing their strategies and addressing the private-label challenge, especially in a scenario of continuing inflation. While enthusiasm about these optimistic outlooks is understandable, we suspect that the most accomplished management teams are privately testing their strategies against still-likely recession or stagflation scenarios and are devising contingency actions as well as no-regrets moves to de-risk earnings per share. Portfolio reshaping is focused on scale legacy brands and premiumization In most cases, we saw growth ambitions expressed in terms of increased distribution and market share. In the case of the best-performing companies, however, we heard a more compelling story based on a passion for their brands and the opportunity to bring those brands to every household and consumer in the world. Those ambitions were backed up by real data on the whitespace for household penetration and growth in underlying demand drivers. Most companies anchored their growth ambitions in their strongest categories. Scale, iconic brands have been the strongest contributors to growth. As such, these beloved, well-known brands were earmarked for an outsized share of company investments in innovation, marketing, advertising, and supply chain capacity. While growth plans prioritized core categories and flagship brands, many companies expressed an intention to grow in adjacent categories. Interestingly, many companies referred to the same categories as growth priorities outside their core, intensifying competition in those sectors. For example, pet food and snacks are viewed as bountiful sources of growth for food companies, while coffee and ready-to-drink alcoholic beverages play that role for beverage makers. Inorganic growth agendas were focused on reshaping business portfolios to emphasize faster-growing and more premium segments, or to achieve category leadership. Recent M&A activity highlighted by management teams included a few notable divestitures and spin-offs: Smucker’s dog food business, Mondelēz’s gum division in developed markets, and Kellogg’s North American cereal business. Analysts were clear on the need for solid value-creation theses for both acquisitions and divestitures. Innovation plans are focused on incremental growth vs. breakthrough disruption Each company shared innovation pipelines across priority brands and categories. In the best cases, innovation priorities were aimed at supporting scale brands, meeting real consumer needs, and delivering premiumization. In the worst cases, they represented less strategic combinations of flavors, packs, and other attributes, adding to assortment complexity at the risk of reducing asset productivity and creating the need for capacity investments. Absent from the discussion were Engine 2 growth priorities, with disruptive topics such as personalized nutrition, augmented services, new delivery models, and others not featured on strategic agendas. It may be that companies are not ready to share such initiatives or that executives feel confident that the sector remains safe from disruption. Data and advanced analytics are finally accelerating commercial capabilities Most consumer goods companies are finally advancing marketing, revenue growth management, and route-to-market capabilities by embedding digitization, data, and advanced analytics. Many have optimized their brand investment via tech-fueled tools. Leaders disclosed that 50% of their marketing budgets were digital expenditures, with AI-driven creative testing and asset personalization delivering higher ROI. Coca-Cola announced its collaboration with OpenAI and Bain & Company, initially focused on developing AI-driven content, with more opportunities on the horizon. While we see most companies accelerating their commercial capabilities via data and advanced analytics, we have yet to witness true digital transformation, such as application of widespread closed-loop activation and consistent optimization of brand investment. Leading companies seem to be pulling ahead in what has become the new advantage of scale: the ability to outinvest others and establish these digital capabilities as a durable competitive edge. Companies are relentlessly pursuing asset productivity and cost efficiency Operational productivity and cost management were on every company’s agenda. Some have undertaken large cost programs, while others have built more robust continuous improvement capabilities. Diageo, PepsiCo, P&G, and Coke all discussed their records of achieving consistent productivity improvements by optimizing across functions. Additionally, most companies devoted significant energy to simplifying their product assortment, a move that improved the productivity of their supply chains, commercial investments, in-store shelves, and management time and energy. We expect more companies to focus on building capabilities to constantly improve asset productivity. Increased cross-functional optimization, automation, and meaningful operating model changes will unlock the next wave of productivity growth. Few companies are deeply embedding ESG in their strategy and operations It felt as if many companies viewed environmental, social, and corporate governance (ESG) as a reporting obligation rather than as an opportunity for transformation and growth. When management teams did discuss ESG, most acknowledged their commitments rather than disclosing progress. Some mentioned embedding ESG themes in their brand positioning, primarily using it as marketing copy. Those that have emerged as ESG leaders, however, achieved tangible results in their supply chains, innovation, and culture—linking resource and waste-reduction actions to profitability. For example, P&G reported on its industry-changing innovations in materials science and waste reduction, while Diageo noted the linkage between stronger ESG performance and profitability. Despite these highlights and others, there remains a significant amount of work for the industry, its suppliers, governments, and consumers before we can realize a vision of zero net externalities. Significant moves toward food systems transformation and circularity were not discussed. Questions for further consideration In light of these observations, we offer a few provocations for consumer goods companies to consider as they shape their longer-term strategic agenda. If a recession becomes the reality and consumers demonstrate more elasticity, how will consumer goods companies adjust their growth algorithms and strategies? Will a recession generate as many transformational M&A deals as we saw during the last downturn? If so, how will companies ensure that M&A moves are accretive for their business and category? As portfolios become more focused to drive category leadership, where will consumer goods companies find further opportunity for growth beyond premiumization? Will we soon see more transformative Engine 2 growth strategies, or is there enough stability and incremental growth remaining in the sector to eschew disruption and new frontiers of growth? With digital now on most companies’ agendas in some way, will they get closer to true digital transformation in the near term? Will we see AI, the metaverse, and other advanced digital technologies drive fundamentally new innovations and ways of working, or will digital be limited to a productivity enabler? Given the significant work to be done on ESG, how will companies prioritize and make progress toward their goals? Will we see a radical uptick in efforts as 2025 and 2030 horizons near? Or if the macroenvironment worsens, could we see a reversal, with ESG falling lower on the strategic agenda? Is the sector headed into a period of peak capital expenditures as companies pursue these opportunities in innovation, productivity, digital, and sustainability? If so, how will the required investment level be funded? Will improvements in asset productivity be sufficient, or will required levels of investment lead to new competitive advantages of scale? We would be happy to discuss these observations with you in more detail or provide sector-specific insights where relevant.

Last week, leaders of publicly traded consumer product companies gathered at the annual Consumer Analyst Group of New York (CAGNY) conference to share their companies’ performances and strategies. Twenty-nine companies across food, beverage, and home and personal care were present. Below are our perspectives on the strategic themes and implications for the industry.

Strong performance this year is the result of normalizing supply chains and price increases that were met with low elasticity

The least surprising theme was that companies achieved strong top-line performance by passing cost inflation on to retailers and consumers in the form of price increases, as well as by boosting product availability and service levels along with the continued normalization of supply chains.

What we found more noteworthy was that the leading companies maintained or even increased brand investment. Procter & Gamble’s CEO was clear: Sustained investment is the key to superior value, and the company will sooner pass on inflation to consumers and customers than cut investment and support for brands. Representatives from Diageo, L’Oréal, and PepsiCo all pointed to strong increases in their marketing and advertising spending over the past few years. They all articulated slightly different versions of the following virtuous cycle: Improve top-line growth and manage costs down to invest back into advertising and promotion, which in turn bolsters top-line growth.

Consumer goods companies are optimistic about the future and presume a macroeconomic soft landing

Companies’ strong growth expectations implicitly assume that there will not be a significant global recession and that robust consumer spending will continue, rebuffing what we've heard from consumers. A belief that capacity will remain a constraint on volume in this environment led many to announce plans for additional capacity to come online in the latter half of 2023.

Most companies reiterated their growth expectations, which ranged from low-single-digit revenue growth for North America–centric food companies to mid-single-digit growth for global home and personal care companies to high single digits for global beverage, snacking, and beauty companies. All assumed positive operating leverage that would result in even higher operating profit growth.

Few companies expressed concerns about competition from private labels, with many indicating that their categories are underexposed. The best performers talked about how they’ve collaborated closely with retail partners, especially to ensure pricing actions. Other consumer goods companies, however, omitted meaningful discussions about how they plan to partner with retailers on implementing their strategies and addressing the private-label challenge, especially in a scenario of continuing inflation.

While enthusiasm about these optimistic outlooks is understandable, we suspect that the most accomplished management teams are privately testing their strategies against still-likely recession or stagflation scenarios and are devising contingency actions as well as no-regrets moves to de-risk earnings per share.

Portfolio reshaping is focused on scale legacy brands and premiumization

In most cases, we saw growth ambitions expressed in terms of increased distribution and market share. In the case of the best-performing companies, however, we heard a more compelling story based on a passion for their brands and the opportunity to bring those brands to every household and consumer in the world. Those ambitions were backed up by real data on the whitespace for household penetration and growth in underlying demand drivers.

Most companies anchored their growth ambitions in their strongest categories. Scale, iconic brands have been the strongest contributors to growth. As such, these beloved, well-known brands were earmarked for an outsized share of company investments in innovation, marketing, advertising, and supply chain capacity.

While growth plans prioritized core categories and flagship brands, many companies expressed an intention to grow in adjacent categories. Interestingly, many companies referred to the same categories as growth priorities outside their core, intensifying competition in those sectors. For example, pet food and snacks are viewed as bountiful sources of growth for food companies, while coffee and ready-to-drink alcoholic beverages play that role for beverage makers.

Inorganic growth agendas were focused on reshaping business portfolios to emphasize faster-growing and more premium segments, or to achieve category leadership. Recent M&A activity highlighted by management teams included a few notable divestitures and spin-offs: Smucker’s dog food business, Mondelēz’s gum division in developed markets, and Kellogg’s North American cereal business. Analysts were clear on the need for solid value-creation theses for both acquisitions and divestitures.

Innovation plans are focused on incremental growth vs. breakthrough disruption

Each company shared innovation pipelines across priority brands and categories. In the best cases, innovation priorities were aimed at supporting scale brands, meeting real consumer needs, and delivering premiumization. In the worst cases, they represented less strategic combinations of flavors, packs, and other attributes, adding to assortment complexity at the risk of reducing asset productivity and creating the need for capacity investments.

Absent from the discussion were Engine 2 growth priorities, with disruptive topics such as personalized nutrition, augmented services, new delivery models, and others not featured on strategic agendas. It may be that companies are not ready to share such initiatives or that executives feel confident that the sector remains safe from disruption.

Data and advanced analytics are finally accelerating commercial capabilities

Most consumer goods companies are finally advancing marketing, revenue growth management, and route-to-market capabilities by embedding digitization, data, and advanced analytics. Many have optimized their brand investment via tech-fueled tools. Leaders disclosed that 50% of their marketing budgets were digital expenditures, with AI-driven creative testing and asset personalization delivering higher ROI. Coca-Cola announced its collaboration with OpenAI and Bain & Company, initially focused on developing AI-driven content, with more opportunities on the horizon.

While we see most companies accelerating their commercial capabilities via data and advanced analytics, we have yet to witness true digital transformation, such as application of widespread closed-loop activation and consistent optimization of brand investment. Leading companies seem to be pulling ahead in what has become the new advantage of scale: the ability to outinvest others and establish these digital capabilities as a durable competitive edge.

Companies are relentlessly pursuing asset productivity and cost efficiency

Operational productivity and cost management were on every company’s agenda. Some have undertaken large cost programs, while others have built more robust continuous improvement capabilities. Diageo, PepsiCo, P&G, and Coke all discussed their records of achieving consistent productivity improvements by optimizing across functions.

Additionally, most companies devoted significant energy to simplifying their product assortment, a move that improved the productivity of their supply chains, commercial investments, in-store shelves, and management time and energy.

We expect more companies to focus on building capabilities to constantly improve asset productivity. Increased cross-functional optimization, automation, and meaningful operating model changes will unlock the next wave of productivity growth.

Few companies are deeply embedding ESG in their strategy and operations

It felt as if many companies viewed environmental, social, and corporate governance (ESG) as a reporting obligation rather than as an opportunity for transformation and growth. When management teams did discuss ESG, most acknowledged their commitments rather than disclosing progress. Some mentioned embedding ESG themes in their brand positioning, primarily using it as marketing copy. Those that have emerged as ESG leaders, however, achieved tangible results in their supply chains, innovation, and culture—linking resource and waste-reduction actions to profitability. For example, P&G reported on its industry-changing innovations in materials science and waste reduction, while Diageo noted the linkage between stronger ESG performance and profitability.

Despite these highlights and others, there remains a significant amount of work for the industry, its suppliers, governments, and consumers before we can realize a vision of zero net externalities. Significant moves toward food systems transformation and circularity were not discussed.

Questions for further consideration

In light of these observations, we offer a few provocations for consumer goods companies to consider as they shape their longer-term strategic agenda.

If a recession becomes the reality and consumers demonstrate more elasticity, how will consumer goods companies adjust their growth algorithms and strategies?
Will a recession generate as many transformational M&A deals as we saw during the last downturn? If so, how will companies ensure that M&A moves are accretive for their business and category?
As portfolios become more focused to drive category leadership, where will consumer goods companies find further opportunity for growth beyond premiumization? Will we soon see more transformative Engine 2 growth strategies, or is there enough stability and incremental growth remaining in the sector to eschew disruption and new frontiers of growth?
With digital now on most companies’ agendas in some way, will they get closer to true digital transformation in the near term? Will we see AI, the metaverse, and other advanced digital technologies drive fundamentally new innovations and ways of working, or will digital be limited to a productivity enabler?
Given the significant work to be done on ESG, how will companies prioritize and make progress toward their goals? Will we see a radical uptick in efforts as 2025 and 2030 horizons near? Or if the macroenvironment worsens, could we see a reversal, with ESG falling lower on the strategic agenda?
Is the sector headed into a period of peak capital expenditures as companies pursue these opportunities in innovation, productivity, digital, and sustainability? If so, how will the required investment level be funded? Will improvements in asset productivity be sufficient, or will required levels of investment lead to new competitive advantages of scale?

We would be happy to discuss these observations with you in more detail or provide sector-specific insights where relevant.